File No. 70-9793
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POS AMC
Amendment No. 7
(Post-Effective Amendment No. 4)
to
FORM U-l
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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FirstEnergy Corp.
FIRSTENERGY SERVICE COMPANY
GPU Service, Inc.
76 South Main Street
Akron, Ohio 44308
(Names of companies filing this statement and address
of principal executive office)
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FirstEnergy Corp.
(Name of top registered holding company parent of applicant)
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Leila L. Vespoli, Douglas E. Davidson, Esq.
Senior Vice President and Thelen Reid & Priest LLP
General Counsel 40 West 57th Street
FirstEnergy Corp. New York, New York 10019
76 South Main Stree
Akron, Ohio 44308
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(Names and addresses of agents for service)
FirstEnergy Corp., FirstEnergy Service Company and GPU Service, Inc.
(collectively "Applicants") hereby amend in its entirety Amendment No. 5
(Post-Effective Amendment No. 2) to Form U-1 filed by Applicants in docket No.
70-9793 on October 15, 2002 as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
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A. Background. By Order dated October 29, 2001 in this proceeding
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(Holding Co. Act Release No. 27459) (the "Merger Order"), as supplemented by
orders dated November 8, 2001 (Holding Company Act Release No. 27483) and
December 23, 2002 (Holding Company Act Release No. 27628), the Commission
authorized the merger between FirstEnergy Corp. ("FirstEnergy"), an Ohio
corporation, and GPU, Inc. ("GPU"), a Pennsylvania corporation. The merger
became effective on November 7, 2001, with FirstEnergy as the surviving entity,
and FirstEnergy registered under the Act as a holding company on the same day.
As a result of the merger, FirstEnergy directly or indirectly owns all of the
outstanding common stock of ten electric utility subsidiaries, Ohio Edison
Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("Cleveland
Electric"), The Toledo Edison Company ("Toledo Edison"), American Transmission
Systems, Incorporated, Jersey Central Power & Light Company ("JCP&L"),
Pennsylvania Electric Company ("Penelec"), Metropolitan Edison Company
("Met-Ed"), Pennsylvania Power Company ("Penn Power"), York Haven Power Company,
and The Waverly Electric Power & Light Company, which together provide service
to approximately 4,300,000 retail and wholesale electric customers in a 37,200
square-mile area in Ohio, New Jersey, New York and Pennsylvania; and one gas
utility subsidiary, Northeast Ohio Natural Gas Corp. ("Northeast"), which
provides gas distribution and transportation service to approximately 5,000
customers in central and northeast Ohio. FirstEnergy's electric and gas utility
subsidiaries are referred to herein collectively as the "Utility Subsidiaries."
FirstEnergy also directly owns all of the issued and outstanding
common stock of FirstEnergy Service Company ("ServeCo"), an Ohio corporation,
which was organized in 2001 in order to become a new service company subsidiary
of FirstEnergy, and GPU Service, Inc. ("GPU Service"), a Pennsylvania
corporation, which was formerly a direct service company subsidiary of GPU.
FirstEnergy also directly or indirectly holds investments in numerous
non-utility subsidiaries that are engaged in a variety of energy-related,
exempt, or otherwise functionally related non-utility businesses (collectively,
the "Non-Utility Subsidiaries"), including FirstEnergy Generation Corp.
("GenCo") and FirstEnergy Nuclear Operating Company ("FENOC"). Reference is made
to Appendix A to the Merger Order for a description of these Non-Utility
Subsidiaries. The Utility and Non-Utility Subsidiaries of FirstEnergy are
collectively referred to herein as the "Subsidiaries."
Under the Merger Order, the Commission granted FirstEnergy a temporary
exemption under its rules in order to enable FirstEnergy to continue to provide
to the pre-merger Subsidiaries of FirstEnergy certain common corporate
services,1 until such time as all of the
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1 These services include: energy supply management of the bulk power and natural
gas supply, fuel procurement, coordination of gas and electric systems,
maintenance, construction and engineering work; customer billing; materials
management; facilities management; human resources; finance; accounting;
internal auditing; information systems; corporate planning and research; public
affairs; legal; environmental matters; and executive services.
service functions performed by FirstEnergy and GPU Service have been
consolidated in ServeCo.2 The Merger Order specified that ServeCo would begin at
least minimal operations within 90 days following closing of the merger, and
that all service functions of FirstEnergy and GPU Service would be transferred
to ServeCo not later than February 1, 20032 The Merger Order states that
FirstEnergy will file a separate application with the Commission on or before
September 1, 2002 (extended upon request to the Staff to October 15, 2002) to
seek authorization for ServeCo to consolidate service company functions now
performed by FirstEnergy and GPU Service, including a form of the proposed
service agreement, policies and procedures and cost allocation methods to be
used by ServeCo.. Employees of FirstEnergy were transferred to ServeCo by
January 1, 2002 and FirstEnergy no longer has any employees and no longer
provides any services. Since January 1, 2002, GPU Service has continued to use
the allocation methods and policies and procedures GPU Service ("GPU Methods")
used prior to the Merger.
ServeCo's authorized capitalization consists of 850 shares of common
stock with no par value, of which one (1) share is issued and outstanding and
held by FirstEnergy. ServeCo will derive substantially all of its needs for
additional working capital from borrowings under FirstEnergy's non-utility money
pool (as authorized in the Merger Order) and/or additional equity investments by
FirstEnergy pursuant to Rule 45(b)(4) or Rule 52(b), as applicable.
B. Summary of Requested Action. In this Post-Effective Amendment,
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FirstEnergy, ServeCo and GPU Service are requesting authorization to consolidate
all common corporate services provided during the pre-merger period to associate
companies in the FirstEnergy system by FirstEnergy and GPU Service in ServeCo.3
In addition, FirstEnergy asks for a delay of the original February 1, 2003 date
for full compliance to June 1, 2003 in order to coincide with FirstEnergy's
implementation of the SAP Enterprise IT Solution project.4 Filed herewith as
Exhibit N-7 is the proposed form of Service Agreement, including cost allocation
methods, which ServeCo proposes to enter into with FirstEnergy and each
Subsidiary that requests services. In addition, FirstEnergy requests
authorization for a separate Service Agreement in the form filed herewith as
Exhibit N-8 among certain of its Ohio Utility Subsidiaries and Penn Power which
will enable these Utility Subsidiaries to render certain
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2 The Merger Order states that FirstEnergy will file a separate application with
the Commission on or before September 1, 2002 (extended upon request to the
Staff to October 15, 2002) to seek authorization for ServeCo to consolidate
service company functions now performed by FirstEnergy and GPU Service,
including a form of the proposed service agreement, policies and procedures and
cost allocation methods to be used by ServeCo.
3 FirstEnergy may seek approval to form one or more additional service companies
in the future including FirstEnergy Nuclear Operating Company and GPU Nuclear,
Inc., which provide operating services to the FirstEnergy nuclear generating
plants under the direction and supervision of the owners thereof.
4 SAP is an Enterprise Resource Planning (ERP) system that links and coordinates
business processes. It will replace existing systems in Human Resources,
Finance, Supply Chain, Distribution and Fossil/Nuclear areas, and will be used
to manage work, share information, track customer accounts, and meet other
business needs.
2
services to each other, all as further described below. Exhibit N-9 is ServeCo's
Policies and Procedures Manual. On January 1, 2003, all personnel of GPU Service
were transferred to and became employees of ServeCo. Thus, GPU Service no longer
has any employees. By January 1, 2004, certain employees who provide service
only to one Utility Subsidiary will be transferred from ServeCo to the
appropriate Utility Subsidiary. Upon full implementation of this reorganization,
it is expected that ServeCo will have approximately 3,580 employees in multiple
locations organized in thirty departments. Applicants now seek a supplemental
order authorizing ServeCo to operate using the GPU Methods through June 1, 2003.
Applicants request that the Commission reserve jurisdiction over the proposed
ServeCo allocation methods, policies and procedures and service agreements filed
or to be filed on this docket.
C. Services to be rendered by ServeCo. Following the proposed
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consolidation of service functions in ServeCo, ServeCo will enter into a Service
Agreement with FirstEnergy, each of the Utility Subsidiaries, and each other
associate company in the FirstEnergy system that requests services from ServeCo.
The Service Agreement will be in the form attached hereto as Exhibit N-7.
ServeCo will provide its associate companies with services in the following
departments, which are described in fuller detail in Exhibit A to the Service
Agreement: administrative services, business development, call center, claims,
communications, controllers, corporate and shareholder services, corporate
affairs and community involvement, credit management, energy delivery and
customer service, economic development, enterprise risk management, FirstEnergy
technologies, FirstEnergy telecom, governmental affairs, human resources,
industrial relations, information services, insurance services, internal audit,
investment management, investor relations, legal, performance planning, rates
and regulatory affairs, real estate, supply chain, transmission & distribution
technical services, treasury and workforce development.
Services rendered by ServeCo will be rendered at cost in accordance
with Rules 90 and 91. The costs of services provided by ServeCo will be directly
assigned, distributed or allocated by work order numbers (or equivalent cost
collectors, collectively, "workorders")5 in accordance with the SEC's Uniform
System of Accounts for Mutual Service Companies and Subsidiary Service
Companies. The primary basis for charges to associate companies is the direct
charge method. Other costs that are not directly assigned, including overheads
and other general administrative costs which will include costs of operating
ServeCo as a separate corporate entity, will be allocated to associate companies
using one or a combination of the methods of allocation that are described in
Exhibit "A" to the Service Agreement.
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5 There are four cost collectors which are equivalent to work orders: "orders",
"cost centers", "networks" and "work breakdown structures" ("WBSs"). Orders
include work orders, sales orders, internal orders and service orders. Each
employee will be assigned to a cost center which will be responsible for
collecting routine costs. WBSs are analogous to work orders and can be used for
projects exceeding certain dollar thresholds or durations, or which involve
investing in capital assets. To ensure proper recordkeeping, each employee will
be required to charge time against a designated order, network, WBS or cost
center number.
3
ServeCo will maintain its accounts, cost-accounting procedures and
other records in accordance with the requirements of the Commission's Uniform
System of Accounts for Mutual Service Companies and Subsidiary Service
Companies. ServeCo will file an annual report on Form U-13-60 in accordance with
Rule 94.
As provided in the Merger Order, and for so long as FirstEnergy
remains a "registered holding company" under PUHCA, no change in the
organization of ServeCo, the type and character of the companies to be serviced,
the methods of allocating costs to associate companies, or in the scope or
character of the services to be rendered subject to Section 13 of the Act, or
any rule, regulation or order thereunder, shall be made unless and until ServeCo
shall first have given the Commission written notice of the proposed change not
less than 60 days prior to the proposed effectiveness of any such change. If,
upon the receipt of any such notice, the Commission shall notify ServeCo within
the 60-day period that a question exists as to whether the proposed change is
consistent with the provisions of Section 13 of the Act, or of any rule,
regulation or order thereunder, then the proposed change shall not become
effective unless and until the ServeCo shall have filed with the Commission an
appropriate declaration regarding such proposed change and the Commission shall
have permitted such declaration to become effective.
1. Cost Allocation Methodology
ServeCo categorizes costs of services provided to affiliates into
three primary categories. Directly Assignable costs represents expenses incurred
for activities and services exclusively for the benefit of one affiliate, and in
many respects, are captured through individual department workorder systems for
specific project billing purposes. Directly Attributable costs represent
expenses incurred for activities and services that benefit more than one
affiliate and which can be assigned using direct measures of costs causation.
The majority of costs incurred by ServeCo fall into the above two categories.
By the very nature of a service corporation, a portion of ServeCo's
expenses will not be directly related to specific current operations or
functions of individual Subsidiaries. Nor are these costs amenable to many of
the cost accounting procedures, which frequently concentrate upon identification
of variable, fixed and semi-fixed costs. Accordingly, it is necessary to develop
formulae that recognize the overall contribution of ServeCo to both the current
and future operations of the FirstEnergy system. After all direct charges have
been made, the remaining costs (Indirect Costs) in each department in ServeCo
must be fairly and equitably allocated among FirstEnergy and the Subsidiaries.
As a registered public utility holding company, FirstEnergy's primary
business is that of owning and operating electric public utilities. As the
electric industry moves through restructuring to permit competition in business
areas once the sole province of historical monopolies, FirstEnergy has begun to
enter competitive energy and energy services businesses to the extent permitted
by state and federal restrictions. Codes of conduct govern the relationship
between the Utility Subsidiaries and their affiliated competitive businesses,
namely, the Non-
4
Utility Subsidiaries. As a public utility holding company, FirstEnergy has
invested capital for infrastructure over many years in the Utility Subsidiaries
so that they may develop the support services necessary to serve their
customers. The costs associated with these infrastructure investments (e.g.,
accounting and human resources systems, telephone circuits and other
communications equipment, mainframe CPU, printers and data storage development
tools and client servers and storage not dedicated to the competitive unit) were
originally incurred, and would continue to be incurred, regardless of whether or
not the Non-Utility Subsidiaries were part of FirstEnergy. These Indirect Costs
will be allocated using a multi-variable formula, which gives weight to more
than one measure of the size of the various Subsidiaries' operations within the
FirstEnergy system, and is particularly relevant under these circumstances.
In accordance with Rule 90(b), ServeCo will direct charge its
associate companies for all costs of products and services where possible. The
costs of products and services provided by ServeCo that cannot be charged
directly to the Subsidiary or Subsidiaries receiving the product or service will
be allocated among all Subsidiaries (and FirstEnergy, where applicable) by
utilizing one of the methods described below. The key determinants in assigning
the allocation methods were the business operations of the Subsidiary or
Subsidiaries receiving the benefit of the product and service, and the
associated cost driver for each product and service. FirstEnergy has developed
sixteen (16) methods of allocation for charging a share of the Indirect Costs to
the Subsidiaries benefiting from the particular product or service being
provided:
a. "Multiple Factor - All" - For the Indirect Costs for products or
services benefiting the entire FirstEnergy system, FirstEnergy and all
Subsidiaries will bear a fair and equitable portion of such costs.
FirstEnergy will bear 5% of these Indirect Allocations. The remaining
Indirect Allocations will be allocated among the Utility Subsidiaries and
the Non-Utility Subsidiaries based on FirstEnergy's equity investment in
the respective groups. A subsequent allocation step will then occur. Among
the Utility Subsidiaries, allocations will be based upon the "Multiple
Factor - Utility" method. Among the Non-Utility Subsidiaries, allocations
will be based upon the "Multiple Factor - Non-Utility" method.
b. "Multiple Factor - Utility" - For the Indirect Costs for a product
or service solely benefiting one or more of the Utility Subsidiaries, each
such Utility Subsidiary will be charged a portion of the Indirect Costs
based on the sum of the weighted averages of the following factors:
1. Gross transmission and/or distribution plant
2. Operating and maintenance expense excluding purchase power and
fuel costs
3. Transmission and/or distribution revenues, excluding transactions
with affiliates
These three (3) factors have been determined to be the most
appropriate for the Utility Subsidiaries in the FirstEnergy system. Each
factor will be weighted equally so that no one facet of the electric
utility operations inordinately influences the distribution of Indirect
Costs.
5
c. "Multiple Factor - Non-Utility" - For the Indirect Costs for
products or services solely benefiting the Non-Utility Subsidiaries, each
Non-Utility Subsidiary receiving the product or service will be charged a
proportion of the Indirect Costs based upon the total assets of each
Non-Utility Subsidiary, including the generating assets under operating
leases from the Utility Subsidiaries.
d. "Multiple Factor - Utility and Non-Utility" - For the Indirect
Costs for a product or service benefiting one or more of the Utility and
Non-Utility Subsidiaries, each such Subsidiary is first assigned a
distribution ratio that is in proportion to the Indirect Costs based on
FirstEnergy's equity investment in such Subsidiaries. Following this
distribution, a subsequent allocation step will then occur. Among the
Utility Subsidiaries, allocations will be based upon the "Multiple
Factor-Utility." Among the Non-Utility Subsidiaries, allocations will be
based upon "Multiple Factor - Non-Utility".
e. "Direct Charge Ratio" - The ratio of direct charges for a
particular product or service to an individual Subsidiary as a percentage
of the total direct charges for a particular product or service to all
Subsidiaries. Indirect Costs are then allocated to each Subsidiary based on
the calculated ratios.
f. "Enterprise Distribution - For the Indirect Costs for products and
services that benefit the entire FirstEnergy system, FirstEnergy and all
Subsidiaries will bear a fair and equitable portion of such costs.
FirstEnergy will bear 5% of these Indirect Costs. The remaining Indirect
Costs will be allocated among the Utility Subsidiaries and Non-Utility
Subsidiaries based on FirstEnergy's equity investment in the respective
groups.
g. "Number of Customers Ratio" - For costs of products and services
driven by the number of Utility customers, the allocation method that will
be used will be the number of Utility customers for the respective Utility
Subsidiary receiving the product or service divided by the total number of
Utility customers.
h. "Number of Shopping Customers" - A "shopping customer" is defined
as a Utility customer who has selected a competitive electric generation
supplier. For costs of products and services driven by the number of
shopping customers, the allocation method that will be used will be the
number of shopping customers for the respective Utility Subsidiary
receiving the product or service divided by the total number of shopping
customers.
i. "Number of Participating Employees - General" - For costs of
products and services driven by all participating employees within the
FirstEnergy system, the allocation method that will be used will be the
number of participating employees for the respective Subsidiary receiving
the product or service divided by the total number of participating
employees.
6
j. "Number of Participating Employees - Utility and Non-Utility" - For
costs of products and services driven by participating employees who work
for the Utility and Non-Utility Subsidiaries, the Subsidiaries receiving
the product or service are first assigned a distribution ratio that is in
proportion to the Indirect Costs based on FirstEnergy's equity investment
in the respective groups. Costs are further allocated by using the number
of participating employees for the respective Subsidiary divided by the
total number of participating FirstEnergy employees.
k. "Square Footage Used Ratio" - Amount of square footage occupied by
a Subsidiary receiving the product or service divided by the total amount
of square footage occupied by all FirstEnergy system companies applicable
to that respective product or service.
l. "Gigabytes Used Ratio" - Number of gigabytes utilized by a
Subsidiary receiving the product or service divided by the total number of
gigabytes used by the FirstEnergy system companies applicable to that
respective product or service.
m. "Number of Computer Workstations Ratio" - Number of computer
workstations utilized by a Subsidiary receiving the product or service
divided by the total number of computer workstations in use by the
FirstEnergy system companies applicable to that respective product or
service.
n. "Number of Billing Inserts Ratio" - Number of billing inserts
performed for a Subsidiary receiving the product or service divided by the
total number of billing inserts performed for the FirstEnergy system
companies applicable to that respective product or service.
o. "Number of Invoices Ratio" - Number of invoices processed for a
Subsidiary receiving the product or service divided by the total number of
invoices processed for the FirstEnergy system companies applicable to that
respective product or service.
p. "Number of Payments Ratio" - Number of monthly payments processed
for a Subsidiary divided by the total monthly number of payments processed
for the FirstEnergy system companies applicable to that respective product
or service.
D. Services to be rendered by certain Utility Subsidiaries to each
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other. FirstEnergy organizes and conducts its Utility Subsidiary operations on a
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regional basis.6
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6 There are nine regions in three states: Western Region - Ohio; Northern Region
- Ohio; Central Region - Ohio; Southern Region - Ohio; Eastern Region- Ohio;
Western Region - Pennsylvania; Eastern Region - Pennsylvania; Northern Region -
New Jersey; and Central Region - New Jersey. Each region has a "Regional
President", as well as a management and support team that reports to the
Regional President. For the most part, each region is entirely within a
particular Utility Subsidiary's service territory. However, two regions -
Western Region - Ohio and Eastern Region - Ohio -- include parts of several
Utility Subsidiaries. Western Region - Ohio, includes all of Toledo Edison and
990 square miles of Ohio Edison's service territory in Sandusky, Ohio. The
Eastern Region - Ohio covers the eastern 2,517 square miles of Ohio Edison, 661
square miles of Cleveland Electric and all 1,112 square miles of Penn Power.
7
These regions operate and are managed as separate business units. The regional
structure focuses on moving accountability and decision making closer to
customers with an emphasis on decentralized operations and providing cost
effective, high-quality service to customers.
Because of this decentralized, regional approach, certain regional
support services (such as Human Resources, Workforce Development and Business
Services) will be accounted for in the appropriate Utility Subsidiary. In the
case of Western Region - Ohio and Eastern Region - Ohio, the employees who must
provide service to more than one legal entity will continue to charge their time
in a fair and equitable manner to all Utility Subsidiaries within that region,
rather than be accounted for in the ServeCo.7 In addition, from time to time,
one Utility Subsidiary may request other services from another Utility
Subsidiary. These services will be provided at cost in accordance with Rules 90
and 91 and billed to the receiving Utility Subsidiary(ies), at cost as set forth
in accordance with a Utility-to-Utility Service Agreement, the form of which is
filed herewith as Exhibit N-8.8 This will allow the regional management to
operate regions as separate units, and provide the most effective service
possible to the customers of the Utility Subsidiaries.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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FirstEnergy estimates that the additional fees, commissions and
expenses incurred or to be incurred in connection with the proposed transaction
will not exceed $25,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
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Section 13(b) of the Act and Rule 88 thereunder are applicable to the proposed
transaction. FirstEnergy believes that ServeCo has been organized so as to
comply with Section 13(b) of the Act and the Commission's rules and regulations
thereunder. In this regard, Rule 88 provides that "[a] finding by the Commission
that a subsidiary company of a registered holding
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7 Of the approximately 5,500 employees in nine Regions, less than 200 employees
provide the "regional" support services discussed herein.
8 The Commission has previously authorized utility companies in a holding
company system to render service to each other. See e.g., Ameren Corporation,
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Holding Co. Act Release No. 26809 (Dec.30, 1997); CP&L Energy, Holding Co. Act
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Release No. 27284 (Nov.27, 2000).
8
company . . . is so organized and conducted, or to be conducted, as to meet the
requirements of Section 13(b) of the Act with respect to reasonable assurance of
efficient and economical performance of services or construction or sale of
goods for the benefit of associate companies, at cost fairly and equitably
allocated among them (or as permitted by Rule 90), will be made only pursuant to
a declaration filed with the Commission on Form U-13-1, as specified" in the
instructions for that form, by such company or the persons proposing to organize
it. Notwithstanding the foregoing language, the Commission has on several recent
occasions made findings under Section 13(b) based on information set forth in an
Application/Declaration on Form U-1, without requiring the formal filing of a
Form U-13-1. See SCANA Corp., Holding Co. Act Release No. 27133 (Feb. 9, 2000);
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New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997); CINergy
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Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994); UNITIL Corp., Holding
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Co. Act Release No. 25524 (April 24, 1992). In this Post-Effective Amendment,
FirstEnergy has submitted substantially the same information for ServeCo as
would have been submitted in a Form U-13-1. Accordingly, it is submitted that it
is appropriate to find that ServeCo is so organized and its business will be so
conducted as to meet the requirements of Section 13(b), and that the filing of a
Form U-13-1 is unnecessary, or, alternatively, that this Post-Effective
Amendment should be deemed to constitute a filing on Form U-13-1 for purposes of
Rule 88.
The proposed transaction is also subject to the requirements of Rule
54. Rule 54 provides that in determining whether to approve an application by a
registered holding company which does not relate to any exempt wholesale
generator ("EWG") or "foreign utility company" ("FUCO"), the Commission shall
not consider the effect of the capitalization or earnings of any subsidiary
which is an EWG or a FUCO upon the registered holding company if paragraphs (a),
(b) and (c) of Rule 53 are satisfied.
FirstEnergy currently meets all of the conditions of Rule 53(a),
except for clause (1). In the Merger Order, the Commission, among other things,
authorized FirstEnergy to invest in EWGs and FUCOs so that FirstEnergy's
"aggregate investment," as defined in Rule 53(a)(1), in EWGs and FUCOs does not
exceed $5 billion, which $5 billion amount is greater than the amount which
would be permitted by clause (1) of Rule 53(a) which, based on FirstEnergy's
consolidated retained earning of $1.85 billion as of September 30, 2002, would
be $926 million. The Merger Order also specifies that this $5 billion amount may
include amounts invested in EWGs and FUCOs by FirstEnergy and GPU at the time of
the Merger Order ("Current Investments") and amounts relating to possible
transfers to EWGs of certain generating facilities owned by certain of
FirstEnergy's operating utilities ("GenCo Investments"). FirstEnergy has made
the commitment that through June 30, 2003, its aggregate investment in EWGs and
FUCOs other than the Current Investments and GenCo Investments ("Other
Investments") will not exceed $1.5 billion. The Commission has reserved
jurisdiction over investments that exceed such amount.
9
As of September 30, 2002, and on the same basis as set forth in the
Merger Order, FirstEnergy's aggregate investment in EWGs and FUCOs was
approximately $1.27 billion,9 an amount significantly below the $5 billion
amount authorized in the Merger Order. Additionally, as of September 30, 2002,
consolidated retained earnings were $1.85 billion. By way of comparison,
FirstEnergy's consolidated retained earnings as of December 31, 2001 were $1.52
billion.
In any event, even taking into account the capitalization of and
earnings from EWGs and FUCOs in which FirstEnergy currently has an interest,
there would be no basis for the Commission to withhold approval of the
transactions proposed herein. With respect to capitalization, since the date of
the Merger Order, there has been no material adverse impact on FirstEnergy's
consolidated capitalization resulting from FirstEnergy's investments in EWGs and
FUCOs. As of September 30, 2002, FirstEnergy's consolidated capitalization
consisted of 34.8% common equity, 1.7% cumulative preferred stock, 1.8%
subsidiary - obligated mandatorily redeemable preferred securities, 56.1%
long-term debt and 5.6% notes payable. As of December 31, 2001, those ratios
were as follows: 30.3% common equity, 3.1% cumulative preferred stock, 2.2%
subsidiary-obligated manditorily redeemable preferred securities, 60.9% long
term debt and 3.5% notes payable. Additionally, the proposed transactions will
not have any material impact on FirstEnergy's capitalization. Further, since the
date of the Merger Order, and, after taking into account the effects of the
Merger, there has been no material change in FirstEnergy's level of earnings
from EWGs and FUCOs.
FirstEnergy's operating subsidiaries are financially sound companies
as indicated by their investment grade ratings from the nationally recognized
rating agencies for their senior unsecured debt. The following chart includes a
breakdown of the senior, unsecured credit ratings for FirstEnergy's operating
utility subsidiaries.
Subsidiary Standard & Poors10 Moody's11 Fitch12
Ohio Edison BBB- Baa2 ---
Cleveland Electric BBB- Baa3 ---
Toledo Edison BBB- Baa3 BB
Penn Power BBB- Baa2 ---
JCP&L BBB --- ---
Met-Ed BBB --- ---
Penelec BBB A2 BBB+
FirstEnergy satisfies all of the other conditions of paragraphs (a)
and (b) of Rule 53. With respect to Rule 53(a)(2), FirstEnergy maintains books
and records in conformity with, and otherwise adheres to, the requirements
thereof. With respect to Rule 53(a)(3), no more than
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9 This $1.27 billion amount represents Current Investments only. As of
September 30, 2002, FirstEnergy had no Genco Investments.
10 Standard & Poor's Rating Services
11 Moody's Investors Service, Inc.
12 Fitch, Inc.
10
2% of the employees of FirstEnergy's domestic public utility companies render
services, at any one time, directly or indirectly, to EWGs or FUCOs in which
FirstEnergy directly or indirectly holds an interest. With respect to Rule
53(a)(4), FirstEnergy will continue to provide a copy of each application and
certificate relating to EWGs and FUCOs and relevant portions of its Form U5S to
each regulator referred to therein, and will otherwise comply with the
requirements thereof concerning the furnishing of information. With respect to
Rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2) and
(3) thereunder have occurred. FirstEnergy states that the transactions
contemplated herein will have no impact on its consolidated capitalization.
ITEM 4. REGULATORY APPROVALS.
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The New Jersey Board of Public Utilities ("NJBPU") and the
Pennsylvania Pubic Utility Commission ("PPUC") have jurisdiction under their
respective state affiliate interests statutes over the proposed Service
Agreement, as it relates to the Utility Subsidiaries that are subject to
regulation by those commissions. No other State commission, and no Federal
commission, other than this Commission has jurisdiction over the proposed
transaction.
ITEM 5. PROCEDURE.
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FirstEnergy requests that the Commission issue a supplemental order
approving the proposed extension not later than February 1, 2003 and that the
Commission issue a further supplemental order approving all other matters as to
which jurisdiction will be reserved at the earliest practicable date so that
FirstEnergy can implement the new service company structure on or before June 1,
2003. It is further requested that: (i) there not be a recommended decision by
an Administrative Law Judge or other responsible officer of the Commission, (ii)
the Division of Investment Management be permitted to assist in the preparation
of the Commission's decision and (iii) there be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
(a) Exhibits:
D-12 - Application of JCP&L to NJBPU for Approval of
Service Agreement.
D-13 - NJBPU Order -- to be filed by amendment.
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D-14 - Application of Penn Power, Penelec and Met-Ed to
PPUC for Approval of Service Agreement -- to be
filed by amendment.
D-15 - PPUC Order -- to be filed by amendment.
N-7 - Form of Service Agreement (including Allocation
Methods) -- previously filed.
N-8 - Utility-to-Utility Service Agreement -- to be
filed by Amendment.
N-9 - Policies and Procedures Manual -- to be filed by
amendment (in paper copy only)
(b) Financial Statements:
Omitted as not relevant to the proposed transaction.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
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(a) The proposed transaction does not involve a major Federal action
significantly affecting the quality of the human environment.
(b) No federal agency has prepared or is preparing an environmental
impact statement with respect to the proposed transaction.
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SIGNATURES
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Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, the undersigned companies have duly caused this statement
to be signed on their behalves by the undersigned thereunto duly authorized.
FirstEnergy Corp.
FIRSTENERGY SERVICE COMPANY
GPU SERVICE, INC.
By:________________________________
Harvey L. Wagner
Vice President and Controller
Date: January 31, 2003
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